UNIT COST DERIVATION
➢ They all needed Budget Estimates to be established.
➢ They all needed to be Measured and Evaluated.
➢ They all needed the most time and cost efficient methods
to be procured.
➢ They all needed the most time and cost efficient methods
to be constructed.
➢ They all needed FINANCE.
➢ They all needed FINANCIAL CONTROL.
Cost engineering is concerned with problems of cost estimation, cost
control, and business planning and management science, including
problems of project management, planning, scheduling, and
profitability analysis of engineering projects and processes.
COMPONENTS OF POJECT COST ESTIMATES
TERMS
RATES
➢ The rates of various items of works, materials to be used in
the construction and the wages of different categories of
labor (skilled and unskilled) should be available for
preparing an estimate. The cost of transportation charges
should also be known.
LUMPSUM ITEMS
➢ A lump sum is a single payment of money, as opposed to a
series of payments made over time (such as an annuity).
BILL OF QUANTITIES
➢ is a document used in tendering in the construction
industry in which materials, parts, and labor (and their
costs) are itemized.
QUOTATIONS
➢ A quotation is a fixed price offer that can't be changed
once accepted by the customer. You must adhere to the
quotation price even if you carry out more work than you
expected. If you think this is likely to happen, it makes
more sense to give an estimate.
COMPLETE ESTIMATE - Most of people think that the estimate of a
structure includes cost of land, cost of materials and labor, but many
other direct and indirect costs included and are shown below.
1. Water supply and sanitary arrangements.
2. Electrical installations like meter, motor, etc.,
3. Architectural features.
4. Contingencies and unforeseen items.
Analysis of rates - In order to provide a correct and reasonable rate
per unit for a particular item, a detailed surveyed called an "Analysis
of rate" should be conducted on costs of materials, labour and
equipment as required for the unit following its specification. The
rate per unit of an item consists of the following:
a) Quantity of materials and their cost
b) Labor cost
c) Cost of equipment, tools or plant
d) Overhead or establishment charges
e) Profit
Types of Contracts
a) Unit-price contract - For unit-price contracts. Contractors
are required to quote rates for various items of work on
the basis of the corresponding unit price.
b) Lump-sum contract - In this form of contract the
Contractor is required to quote a fixed sum for execution
of the work completed in all respects. For such a contract,
it is very important that the drawings and specifications be
comprehensive and show in complete detail all features
and requirements of the work.
c) Contract with lump-sum and unit prices - In this form of
contract the Contractor is required to quote partly a fixed
sum for execution of an entire structure completely
detailed on the drawings, and partly unit prices which may
be required for features of variable quantities such as
excavation of drains for ponds.
d) Negotiated contract - When work is awarded on contract
by mutual negotiation between the parties without call of
tenders, it is said to be a negotiated contract. It may be in
any of the forms mentioned above. Advantages of this
contract are that it brings some economy in expenditure.
The parties selected being always reliable and financially
sound, ensure interrupted work with less chance of
dispute.
Unit-price contract
Advantages of unit-price contract:
✓ This form of contract ensures a more detailed analysis of
cost by the Contractor. The authority concerned with
accepting the tender can easily control the rates with
reference to its own calculations and decide which of the
tenders is favorable.
✓ Since the Contractors are to write rates of individual items
in figures as well as in words, it is not easy to form a ring
during submission of tender and allot work to one of the
Contractors without competition.
✓ The Contractors work out the unit prices of all items of the
Bill of Quantities in order to put them in the bid. Thus, an
unworkable rated tender may be avoided, which leads to
smooth progress and timely completion of the work.
Lump-sum contract
Advantages of lump-sum contract
✓ The employer knows exactly what the work will cost.
✓ Detailed measurements of the work executed are not
required to be recorded except in respect of additions and
alterations.
Labor Cost
There are two keys to developing accurate labor rates. They are:
• Factoring in all direct and indirect costs associated with an
employee or class of employees.
• Accounting for the cost of nonproductive time.
An in addition to wages, employee costs include, but aren’t limited
to:
• State and federal payroll taxes
• Vacation, sick days and other paid time off,
• Employee benefits, including insurance
• Bonuses and retirement plan contributions,
• Workers’ compensation, liability and auto insurance,
 • Training expenses,
• Job-related clothing, safety gear and tools, and
• Company-provided vehicles, cell phones and tablets.
Elements for Reasonable Total Work Hours
➢ WORKING OUT LABOR UNITS
➢ FACTORS TO TAKE INTO ACCOUNT
➢ USING PLANNED PRODUCTIVITY RATES
➢ USING GANTT CHARTS
How to compute Labor Cost?
➢ BASE RATE
➢ LABOR BURDEN
➢ LABOR RATE
➢ LABOR COST
In order to get a clear view of construction labor costs in the
Philippines, it’s essential to examine some key aspects:
• Construction costs per square meter
• Laborer gross salary
• Labor cost the Philippines
How Much Is Construction Labor Cost In The Philippines?
In the current market, several key trends have emerged, influencing
labor cost calculations in the Philippines residential construction
sector:
➢ Inflation: With the rising cost of living, wages for
construction labor have followed suit, contributing to
higher labor costs for building residential properties.
➢ Urbanization: A growing demand for housing in densely
populated areas such as Metro Manila has driven labor
costs higher in these regions compared to more rural
provinces.
➢ Workforce Safety: The ongoing pandemic has necessitated
implementing additional safety measures on construction
sites, leading to increased labor costs for some projects.
LABOR COST PER DAY
LABOR COST PER HOUR
Calculating Labor Cost: Factors to Consider
• Number of working hours per day
• Number of working days per week
• Project duration
• Worker skill level
• Location of the construction site
Comparative Analysis: Labor Cost Across Various Regions in The
Philippines
This comparative analysis focuses on the National Capital Region
(NCR) and other rural areas in the country, shedding light on factors
such as accessibility, material costs, economic conditions, and local
regulations.
• Accessibility: NCR has better access to infrastructure, such
as airports, seaports, and road networks, making it easier
to transport materials and labor to urban construction
sites. Rural areas, on the other hand, have limited
accessibility, which can cause logistical challenges and
drive up costs.
• Material Costs: Being closer to major ports and suppliers,
urban areas often enjoy more competitive pricing for
construction materials. In contrast, rural areas may face
higher transportation costs, which can then affect material
costs and, subsequently, labor costs.
• Economic Conditions: Urban regions like NCR often have
stronger overall economic activity, leading to higher
demand for construction services. This demand drives up
wages, as companies compete for skilled and unskilled
labor. Rural areas have less economic activity, translating to
lower labor demand and costs.
• Local Regulations: Local government regulations may also
affect regional labor costs. For instance, minimum wage
rates vary significantly across provinces, and local
governments may impose different requirements
concerning worker safety, licensing, and other factors, all
of which can influence labor costs.
Labor, Material and Equipment Utilization
Good project management in construction must vigorously pursue
the efficient utilization of labor, material and equipment.
➢ Labor Productivity
➢ Material Management
➢ Construction Management

Labor Productivity (Output per hour)

it is important to note that labor productivity is a measure of the
overall effectiveness of an operating system in utilizing labor,
equipment and capital to convert labor efforts into useful output,
and is not a measure of the capabilities of labor alone.
COST PLAN
• Critical breakdown of the cost limit for the building(s) into
Factors Affecting Job-Site Productivity
cost targets for each element of the building(s)
Labor Characteristics
• Provides a statement of how the design team proposes to
➢ age, skill and experience of workforce
distribute the available budget among the elements of the
➢ leadership and motivation of workforce
building.
Project Work Conditions
• Provides both a work breakdown structure and a cost
➢ Job size and complexity.
breakdown structure.
➢ Job site accessibility.
➢ Labor availability. • Utilizes approximate quantities and quality parameters.
➢ Equipment utilization.
➢ Contractual agreements. PURPOSE OF COST PLAN
➢ Local climate. ✓ To understand whether the building project is affordable.
➢ Local cultural characteristics, particularly in foreign ✓ Ensure that the cost target for each element of the project
operations. is reasonable and up to date.
Non-productive Activities ✓ Confirm that the cost limit has not been exceeded.
➢ Indirect labor required to maintain the progress of the
project ADVANTAGES OF COST PLAN
➢ Rework for correcting unsatisfactory work. ✓ It can assist the design team in controlling the total
➢ Temporary work stoppage due to inclement weather or building cost.
material shortage ✓ Helps spreading the controlled cost between the various
➢ Time off for union activities elements of the building in the most efficient manner.
➢ Absentee time, including late start and early quits ✓ Ensure the best use of the employer’s money.
➢ Non-working holidays
➢ Strikes What is Cost Planning?
➢ It is a budget distribution technique that Is implemented
Material Management during the design stages of a building project.
Materials represent a major expense in construction, so minimizing ➢ It involves a critical breakdown of the cost limit.
procurement or purchase costs presents important opportunities for
reducing costs. Poor materials management can also result in large PURPOSE OF ELEMENTAL COST PLANNING
and avoidable costs during construction. ➢ Ensure that employers are provided with value of money.
➢ PLAN AND SPECIFICATIONS ➢ Make employers and designers aware of the cost
➢ REQUISITIONS consequences of their desires and/or proposals.
➢ QUOTATION AND BID ➢ Provide advice to designers that enables them to arrive at
➢ PURCHASE ORDER AND SUBCONTRACTS practical and balanced designs within budget. ➢Keep
➢ SHIPPING expenditure within the cost limit approved by the
➢ RECEIVING DOCUMENTS employer.
➢ INVOICES ➢ Provide robust cost information upon which the employer
can make informed decisions.
Classification of Material for Delivery ➢ Take-offs (depends on design phase, GIA, or elemental
➢ BULK MATERIALS units or approximate quantities.)
➢ Provide as much detail and description as possible.
➢ STANDARD OFF-THE-SHELF
➢Interrogate Architect/Engineers/Client to fill gaps in
➢ FABRICATED
information.
➢ Insert costs using current data frim relevant similar
Example of procurement and delivery schedule: projects or data bases.
➢ Benchmark and market testing.
➢ Detail assumptions and exclusion.
CONSTRUCTION COST ENGINEERING When we are studying about the cash flow, it is essential to get an
CONTRACT CASH FLOW idea regarding the dates when the expenditure is going to occur. So,
CASH FLOW the following figure shows the difference between the expense and
➢ The term cash flow refers to the net amount of cash and the costs of a construction project.
cash equivalents being transferred in and out of a
company. Cash received represents inflows, while money
spent represents outflows.

Why is it necessary to forecast the cash flow?

• To get an idea about the ability to meet the demands with
the cash.
• It helps the contractor to determine the maximum amount
of cash required.
• Lending companies consider it as a reliable indicator.
• It proves the utilization of resources to gain profits for the
owners and investors.
Three main ingredients in the determination of cash flow
• Expenses (Cash out) The S-Curve
• Income (Cash in) S-Curve is a line that shows the cumulative expenditure of a project
• Timing of payments direct and indirect cost per time. As you can see in the below figure,
this line gets the S shape. Most of the time, the owners ask the
CONSTRUCTION PROJECT COSTS contractor to present such S-Curve for the lifetime of the project.
Computing the cost is very important while preparing the cash flow
for the project. Use of the materials, subcontractors and labors lead
to the principal components of the contractor’s costs. Taxes,
interests on loans, supervision, support staff and insurances create
the overhead cost. There are three types of classifications of costs
that spend on a particular project. They are fixed cost, time-related
cost and quantity-proportional cost.

Project Direct Costs

The costs and expenses that are accountable directly on a facility,
function or product are called as direct costs. In construction
projects, the direct costs are the cost incurred on labor, material,
equipment etc. These costs for a construction project are developed
as estimates by means of detailed analysis of the contract activities,
construction method, the site conditions, and resources. Different
direct costs in construction projects are material costs, labor costs,
subcontractor costs, and equipment costs.
The steps to develop a S-Curve
• Construct a simple bar chart for all tasks of the relevant
project.
• Use the task duration and assign the costs to each task.
• Plot the cumulative amounts of the expenditure against
the time by connecting the amounts of expenditures over
the time.

Project Indirect Costs Project Income (Cash-in)

The costs, unlike direct costs, is not directly accountable for a The form of the progress payments is the flow of money from the
particular facility, product or function. Indirect costs can be either owner to the relevant contractor. The contractor makes the
variable or fixed. The main sections coming under indirect costs are estimates of the completed work periodically. The percentage of the
personnel costs, security costs, and administration costs. These costs total contract completion or the actual field measurement of the
do not have a direct connection with the construction project. The placed quantities are the evaluations that work as bases to estimate
indirect cost can be classified as: them. Usually, the owner retains 10% from all validated progress
• PROJECT OVERHEAD COSTS payment that was submitted by the contractor. Moreover, the
Project overhead costs can either be fixed or time related contractor receives all the accumulated retainage payments with the
costs. Different costs coming under overhead costs are the last payment.
costs of stores, safety facilities, workshops, offices, staffs
and parking facilities. All those plants that are required to
support the working crews will come under this cost. The
overhead cost is estimated by a detailed analysis of the
site-related activities and their cost.
• GENERAL OVERHEAD COST
The general overhead costs will include the cost of the
design engineers, expenses of head-office, cost of directors
and managers, schedulers etc. The general overhead
expense and cost are found reasonable through
continuous monitoring of the company expenses.
The difference between income and revenue is that income is
calculated by subtracting all the depreciation, interest, taxes, and
other expenses of a business from its total revenue of that year. Cost of Borrowing (Return on Investment)
And Revenue is the sum total of all the earnings of a business during ✓ They can borrow money.
a financial year. ✓ Use the reserved funds.

Retention
Retention is the amount that the owner kept from all invoices before
paying for the contractor.

Why is it important?
➢ Because it ensures that the contractor will continue the
work and any problem won’t arise after the completion.
Furthermore, this retained amount will be paid to the
contractor at the end of the relevant contract, and it is an
amount between 5% to 10% from all invoices as
mentioned above.

Advanced payment
There are mobilization purposes, and this is the amount that paid for
such requirements. After that, advanced payment will be reduced
from the contract progress payment. In addition to that, there are
many benefits of this action. It helps to prevent the contractor from
loading the price at the start of the contract.
Most of the time, the projects that use an expensive site
preparation apply this strategy.

Calculating Construction Cash Flow

We can take by plotting the contract expense and the income curves.
The difference between those points of the curves become the cash
flow. According to the below figure shows, the hatched area is the
difference between expense and the income curves.

• The project bar chart

• Activities direct and indirect cost
• Contractor’s method of paying his expenses
• Time of payment delay by owner

The steps of calculating the cash flow:

• Perform project schedule and decide the project and
activities timing
• Take the early or late timing as the base and draw the bar
chart
• Calculate the cost per time period and the cumulative cost
• Consider the method of paying the cost to produce the
expense and adjust it
• To determine the income, take the retention and delay of
the owner payment as the base to adjust the revenue
• Calculate the cash flow at the contract different times.

Minimizing Contractor Negative Cash Flow

The actions follow to minimize the negative cash flows.
• Adjust the work schedule to late start timing to delay
payments.
• Reduce the delays in receiving revenues.
• Requesting for advanced or mobilization payments
• Decrease the retention and increase the markup.